A spike in yields for the 10-year US Treasury is not expected to have a significant impact on the commercial real estate debt markets, including the issuance outlook for the commercial mortgage-backed securities market.
The 10-year Treasury was trading at around 1.87 percent on Tuesday, its highest level since January 2020, while the yield on the 30-year Treasury was at 2.19 percent. By comparison, the 10-year Treasury started out the year at 1.63 percent.
“The 10-year Treasury is definitely higher than it was,” Alan Todd, a managing director and head of commercial mortgage-backed securities strategy at Bank of America, told Real Estate Capital USA. “But the reality is that it is still a pretty manageable level. Yields are higher but it’s not material at this point where it might cause any meaningful market disruption.”
The markets are responding to the Federal Reserve’s hawkish twist, outlined in its December meeting in which chairman Jerome Powell outlined three interest rate hikes in 2022 as well as a faster-than-expected tapering program for its asset purchase program. The program will now end in mid-March, Todd noted. The Federal Reserve is now expected to raise rates four times this year, he added.
One question that needs to be resolved: will economic data justify the Fed’s hawkish moves? Or will this be interpreted as a policy error?
“Although the answers to these questions will be data-dependent, we wouldn’t rule out and almost expect an uptick in market volatility and retracement in yields as the Fed begins to raise rates,” Todd says. “Although spread volatility is likely to increase, we would use any widening as an attractive opportunity add exposure and think that longer-duration [last cash flow] AAA bonds may be attractive from a total return perspective if Treasury yields decrease.”